Subscription Tune-Up: A Look Under the Hood

Image for post
Image for post

Everywhere you look, headlines tout the success of subscription-based businesses. They’re “exploding with growth,” they’re “booming,” and on the subway in New York, you simply can’t escape the advertisements.

Honestly, I love the business model because if you get it right, it’s hard to mess up — at first glance, it appears that your customer base is on autopilot. I certainly can’t envision giving up my monthly subscriptions for data storage, music and media. Even if Blockbuster was still a going concern, can you imagine heading to a store to rent DVDs instead of streaming from Netflix? It’s simply not a user experience any of us would choose to return to.

In the case of Netflix, while customer acquisition costs are growing domestically, the company had a positive third quarter, and internationally, growth is on a steep upward climb. Meanwhile, ipsy is showing everyone how it’s done — first you build the community, and then you market to them.

That’s exactly the advice John Warrillow gives in The Automatic Customer. He makes the case for expanding existing businesses into subscription services where possible for the same reason I gravitate toward them: you don’t start each month at zero but with a (hopefully growing) base of customers. The reason I use the book as a resource is because Warrillow delineates subscription businesses into nine categories and shows the formulas needed to sustain each one. While I won’t go into all nine, the membership model is an interesting to look at, since loyalty leads to increased sales. For instance, Amazon customers typically spend $600 on Amazon per year, whereas Prime members spend $1400. But Warrillow’s most salient point in favor of subscription services is their valuation — they typically sell for three to five times the amount of their non-subscription-based competitors.

Yet creating a sustainable subscription-based business is riskier and more difficult than most people think and pushing subscription services beyond “nice to have” is what separates winners from losers. Simply put, not all products and services are destined to depend on the automatic money of subscriptions. Think Blue Apron, which experienced a 70% churn in their customer base, or MoviePass, whose conditions changed so drastically they essentially have no more customers, or BirchBox, where reliance on $10 boxes of makeup overshadowed its desire to get subscribers to purchase full-size makeup from their online store.

So, ask yourself, what makes your offering worthy of a month-to-month commitment? The focus here is the Unique Selling Proposition (USP). The litmus test for the customer is “Will I miss this? Can I live without it?” You need to go beyond your Profit and Loss statements to uncover the key metrics essential to a successful subscription service. If you look at it purely from a P & L statement you could be fooled into thinking your business is more successful than it is.

What you need to think through in building your subscription-based business:

· Subscription Management System or Ecosystem

· Product Shipment Configurations

· Offer Development and Testing

· Budget Planning

· Long Term Value (LTV) proforma

· Payment Processor

· CRM Platform

· Reporting and Analysis

If all that sounds overwhelming, take a look at Fosina, which can help you operationalize your subscription-based business. If you don’t set it up right in the beginning, you’ll always be hurting.

In February 2018, McKinsey reported that the “subscription e-commerce market has grown by more than 100 percent a year over the past five years,” leading to $2.6 billion in sales in 2016, compared to $57.0 million in 2011. Where are these sales coming from? Young professionals in largely urban environments with an income bracket of $50K-100K. Why do they sign up? For cost savings and novelty.

The opportunities are plentiful; don’t dissuade yourself from jumping in the fray. Just know what you’re getting into.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store